Fifth Third Bancorp (FITB -1.15%) has been fighting battles on a few different fronts in the past few weeks.
Like just about every other company currently operating, it's been dealing with the negative financial impact of the COVID-19 pandemic.
Beyond that, it's also been hurt by the Federal Reserve lowering the prime interest rate to the 0% to 0.25% range. Lower interest rates reduce the amount of yield banks earn on loans, thus reducing their profitability. Interest rates at 0% to 0.25% obviously drastically reduces profit margins. That, in turn, has led to investors selling off bank stocks this week, as my Foolish colleague Joe Tenebruso explained. Firth Third made the bulk of its income, $1.2 billion in the fourth quarter, in net interest income. Its net interest margin, which is the difference between what the bank earns in interest from loans versus what it pays out to customers, is 3.27. That margin will probably shrink as a result of the Fed's actions.
On top of those two strong headwinds, Fifth Third got hit with a lawsuit from the Consumer Financial Protection Bureau (CFPB) on March 9 for alleged illegal practices. Firth Third denies the allegations and vows to fight the lawsuit.
All this adds up to tough times for Fifth Third as the stock is down about 27% in the past five days during trading on Tuesday, and 54% year-to-date.
The CFPB's lawsuit alleges that Fifth Third opened deposit and credit card accounts in customers' names and transferred funds from existing accounts to the new, unauthorized accounts. Also, CFPB says that Fifth Third enrolled customers in online-banking services without their consent, violated various other CFPB rules, and violated the Truth in Lending Act and the Truth in Savings Act.
The suit says the company used a "cross-sell" strategy to increase the products and services it provided to customers and deployed an incentive program to reward selling new products. Further, the CFPB alleges that Fifth Third didn't take sufficient action to detect and stop this conduct. These actions occurred through at least 2016, the CFPB alleges.
"Reasonable sales goals and performance incentives are not inherently harmful. But when such programs are not carefully and properly implemented and monitored, as the Bureau alleges here, they may create incentives for employees to engage in misconduct in order to meet goals or earn additional compensation," CFPB officials said.
The CFPB is suing for an injunction to stop the conduct, redress for affected consumers, and a civil money penalty. The complaint does not claim that Fifth Third violated the law.
Fifth Third's denial
Fifth Third released a statement on March 9 rejecting CFPB's allegations.
"Fifth Third Bank respects and values the important role that the CFPB plays in protecting consumers but believes that the civil suit filed today is unnecessary and unwarranted. The Bank will defend itself vigorously and is confident in the outcome," Susan Zaunbrecher, chief legal officer at Fifth Third Bank, said.
Zaunbrecher said the company's compensation and employee incentive structure doesn't reward employees for opening unauthorized accounts. She said the incentive compensation system focuses on account quality. "In fact, it claws back compensation from employees for accounts that are unused or closed shortly after they were opened."
Further, she said the company has controls in place to prevent and detect unauthorized account openings.
Zaunbrecher added that the bank has fully cooperated with CFPB's investigation and provided nearly half a billion pieces of data in defense of its actions. She said the CFPB has not informed the bank of any unauthorized accounts beyond the fewer than 1,100 accounts that Fifth Third itself identified out of 10 million accounts opened between 2010 and 2016.
"These accounts involved less than $30,000 in improper customer charges that were ultimately waived or reimbursed to customers years ago. While even a single unauthorized account is one too many, we took appropriate and decisive action to address each situation," Zaunbrecher said. "The Bank is confident that it has treated its customers fairly. When a federal court examines the evidence, we believe it will agree with Fifth Third that this is a limited and historical event. The Bank will press for an early trial."
Fifth Third has done a good job of mitigating the impact of lower interest rates over the past year by reducing its interest rate to 1%, below the Fed funds rate at the time, to reduce its reliance on interest income and focus on deposit growth. It has also worked to reduce expenses.
It's a tough time for banks, but Fifth Third may be better positioned than most. However, the lawsuit adds an extra element of uncertainty. Although the sell-off has made the bank a really cheap investment right now, now is not a great time to jump into bank stocks.